Still Trustworthy

Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Wall Street, some companies can be trusted more than others.  Some companies consistently make money and hit their goals.  Others just talk about commitment to shareholder value without ever delivering on their promises.  If you'd prefer a stock you can trust, Sandridge Mississippian Trust 2 (NYSE: SDR) may be worth a look.

After Three Quarters

This royalty trust went public earlier this year.  It didn't create too much buzz on the internet, and its IPO came and went without much fanfare.  Although it's still not recognized for its value in the investment community, this trust has been exceeding their promises to their stockholders.

Their prospectus had outlined what they hoped their royalty payouts would be for the first year.

<table> <tbody> <tr> <td> </td> <td><strong>Estimated Payout</strong></td> <td><strong>Actual Payout</strong></td> </tr> <tr> <td><strong>1st</strong></td> <td>$0.26</td> <td>$0.2677</td> </tr> <tr> <td><strong>2nd</strong></td> <td>$0.46</td> <td>$0.4972</td> </tr> <tr> <td><strong>3rd</strong></td> <td>$0.56</td> <td>$<span>0.5986</span></td> </tr> <tr> <td><strong>4th</strong></td> <td>$0.60</td> <td><em>TBA</em></td> </tr> </tbody> </table>


With each payout, they have been able to exceed their estimated payout.  This signals two things to me:

  1. The people running this trust know what they're talking about
  2. Their estimates for this trust's performance were conservative

Dropping Share Price

When this stock IPO'ed at around $21/share, I thought it was a steal.  I was more than happy to jump in right away, rather than wait for a chance to buy the shares cheaper.  I thought it was already cheap enough.  However, as it goes, we are down around 16% since the IPO earlier this year.

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SDR data by YCharts

Sandridge Energy (NYSE: SD) is the parent company of this royalty trust.  They also happen to have two other royalty trusts: Sandridge Permian Trust (NYSE: PER) and Sandridge Mississippian Trust 1 (NYSE: SDT).  As you can see, all four have been hammered pretty hard over the last 6 months.

What Gives?

So why are these stocks falling?  Well, there are several factors involved.  The first, and most prominent reason, is that Sandridge Energy is not an investor favorite right now.  Many people are very uncomfortable with the friendship between Sandridge's CEO Tom Ward and Chesapeake Energy's (NYSE: CHK) CEO Aubrey McClendon.  I can appreciate the uneasiness.  The decisions that Chesapeake's CEO has made has caused investors to lose confidence, the company to lose money, and the share price to fall over 40% from late February to early May this year.

Ward and McClendon founded Chesapeake energy together, and were both still in command when the company went public.  It wasn't until 2006 that Ward left to found Sandridge.  However, it has come to light that for 4 years these guys were running an off-the-books $200 million hedge fund.  Not only was the practice extremely risky, it was also possibly unethical.  The situation is but one event in a string of news articles demonstrating specifically McClendon's use of Chesapeake Energy for his own benefit, not necessarily that of shareholders.  Given their previous relationship, and the fact that they ran the hedge fund together, it seems to indicate that Ward may also lean on the side of of taking big risks for personal benefit.

But I don't want to convey that Sandridge's problems are just bad press and bad friends.  They have their own issues.  Sandridge's net loss for the 3rd quarter was $184 Million.  Last year they had a net profit of $561 Million.  That's quite a swing.  As Sandridge hits speed bumps, you should expect there to be a trickle down effect to the royalty trusts.

Another reason these stocks are falling is a problem with the royalty trusts themselves.  Payouts have been falling for Sandridge Mississippian Trust 1, and have been inconsistent for Sandridge Permian Trust.

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SDT Dividend data by YCharts

We showed earlier that not only is Mississippi 2 beating their payout estimates, their payouts have increased each quarter so far.  As the chart shows, this has not been the case for its royal siblings.

What Now?

Sandridge Mississippian Trust 2 is being drug down by its family.  While its parent struggles to make a profit, and its siblings are decreasing their payouts, Mississippi 2 is doing everything right.  This decline in stock price actually should make shareholders who reinvest their dividends very happy.  As the stock price declines, and the payouts increase, reinvested dividends go even further.

Let's suppose you own 100 shares of Mississippi 2.  Your payout for this quarter is $59.86.  Let's also suppose that the share price holds steady at $17.70 (where it closed on Friday) until your dividend gets reinvested.  This quarter you'll be able to get 3.38 more shares.  Now let's suppose that instead of holding at $17.70, the share price rallies to its IPO price of $21.  You'll only be able to get 2.85 more shares.

Reinvesting dividends is essentially compounding interest.  According to Albert Einstein, compound interest is the most powerful force in the universe (And rumor has it he was pretty smart).  When dividends go up, and the stock price goes down, compound interest works even harder for you.


Don't worry about this royalty trust's share price right now.  What's important is that the payouts are better than expected up to this point.  However, don't just forget this investment completely.  Keep your eyes open for any changes that would put this investment in question.  But up to this moment in time, Sandridge Mississippian Trust 2 is still trustworthy.

thequast owns shares of SANDRIDGE MISSISSIPPIAN TR II COM. The Motley Fool owns shares of SANDRIDGE MISSISSIPPIAN TR II COM and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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